The prospects for emerging market debt are also quite promising. Local currency bonds should benefit from a recovery in emerging currencies, which our model shows are trading some two standard deviations below fair value. Bond valuations are also attractive – the yield differential between emerging market local currency and developed government debt is far above the long-term average. Valuations aside, monetary policy should also provide some support – we believe a growing number of emerging central banks will take advantage of a decline in inflationary pressures to shift to a more dovish stance this year to cement growth. China and India’s recent interest rate cuts are part of this trend.
Overall, I am pretty sanguine about 2015 – there are reasons to be optimistic. But the year also promises market dislocations that present both opportunities and risks for investors. Tactical allocation will be key, as will hedging against a possible rise in market volatility.
Andrew Cole is senior investment manager, multi-asset team of Pictet Asset Management
Key Points
The investment climate in 2015 is unlikely to be so harsh as the political climate.
The preferred developed world stock market for 2015 is Japan.
The outlook for emerging market stocks is improving, but not for every sector or country as the recent fall in the price of oil and other commodities is a mixed blessing.
